April 29, 1998

ENTERPRISE SPECIAL REPORT: THE MIDDLEMAN, PART 2, DEATH OF THE SALESMAN

Presented by the MIT Enterprise Forum of New York City

In this latest installment of the MIT Enterprise Forum of New York City Inc., speakers focused on technological changes affecting business-to-business selling in a session titled "The Death of the Salesman." BW Enterprise is pleased to provide excerpts from the meeting. Today's comments are from Robert O'Malley, CEO of Pinacor (formerly MicroAge Distribution), a major computer distributor and reseller that has been using the Internet to reach its customers. Also speaking: Ron Parsons, Director of E-Commerce Business Strategy at CommerceNet, an industry consortium for companies using, promoting, and building electronic commerce systems via the Net.

ROBERT O'MALLEY, CEO OF PINACOR

I have spent the last eight years of my life in the PC end of the computer business, in just about every dimension: sales, marketing, domestic, international, finance, IS, and both the manufacturing side of the business as well as the distributor and integrator sides of the business....

This is a tough business that I'm in anyway. I'm the middle guy that everybody tries to talk about disintermediating. Our business generates a whopping profit margin of 1%, so we have to make it up in volume. We're growing at [over] 30% in this crazy industry -- so twice the industry rate in terms of what most industry analysts would say: that the PC-related business is growing in the 15%-18% range. We're in the middle. We are more and more at risk. Making 1% is O.K. if risk is low, but when risk is high, it becomes pretty difficult. Risk becomes high when product obsolescence is such a big factor and you have to get efficient quickly or you'll be out of business no matter how fast you grow.

So, I thought I'd take you through this. Pinacor was formerly MicroAge Distribution and is at a run-rate of $5 billion, with operations in North and South America. We are the third-largest American distributor. The first in size would be IngroMicro, the second would be TechData. I position us as leaders in supply chain initiatives. Nobody voted on that, I just sort of claimed it. It sounds nice. What the old technology sales rep used to do, and since I was one, I can speak with authority on this subject, was go out and educate the customer. A typical example is the process of a product announcement at IBM. We would go to school for product announcement. In fact, they had to teach the teachers. The teachers learned first. They would then go into the sales office and teach the salesman about the new gigaplex or something like that. Then the salesman would go out and teach the customers. So it was a very serial process.

It was also discrete; one product at time. Once the customer was educated, we would sit down and run a configurator for them, and this would take sometimes multiple hours sitting to do a configuration on the system, which would include financial analysis and everything. We would then quote a price to the customer and usually come out to the customer, and say, "Take it or leave it. You better get your order in today because the backlog is already a year and a half." Then we would spend our time managing order backlog so about 90% of the time was spent in administrative kinds of things and most of them in the IBM office, not out with the customer. And of course, periodically we would take the customer to lunch because that's what the salesman did. Golf took too long, but you could always take the customer to lunch.

If I look at the left-hand side [referring to the slide presentation] -- compressed technology cycles -- the point here is that Intel, once they build a fab [chip fabricating process], the incremental cost to make that next wafer is virtually zero. So, the way they maximize revenue is by making more and more of these devices. It's like that last seat in the airplane. What does it cost the airline to put somebody in that last seat? Well, a can of Pepsi, that's about what it costs. There may be a message in the computer industry. Why do you buy a 300 Mhz PC? Well, it was there. I couldn't get 300 Mhz a year ago, but now I can. You should see how fast Excel works. So, take processors, memory, storage, software, even networking, because as networking and other functionality goes into silicon it's going to be the economic model. [For all of these,] the more production I can do, the more money I will make on the left-hand side.

On the right-hand side is the business consumption. Their dynamic is that their businesses are changing so they want a supply chain that reacts to the dynamics. They want that optimized for them. More and more, I think businesses are starting to wake up and say, "Wait a second, that model you produced, IBM? That really wasn't optimized for me. It's one of your engineers that thought 5728X4U was the right thing for the marketplace, and it may not be the right thing for me. I want something that's for me. In fact, I want something that comes from you that I can just plug into my network and go to work. I may already want my data already loaded on it if I have an old machine that I want to get rid of, and I want you to somehow figure out what data is on that machine and have the network load it dynamically. I want real-time supply information. I don't want to know what you had even yesterday. I want to know what it is today, and I want native standard support. That means when I select standards, I want you as a supply chain participant to support those standards wherever they are around the world -- it doesn't matter."

In the top there, I've got increased content. In other words, everybody was O.K. with just a PC. The first ones you got had one slot for the diskette drive, and the operating system was on another diskette. So you loaded the operating system, and everybody was happy with that. Now they're not happy with that. They want not just a fully loaded PC: They may want a network. I've got life insurance agents out there, branch banks, or car dealerships, and I want to put a consistent system in all these dealerships. So I want you to manufacture the system, the server, and everything, and I want you to ship it there for the weekend and install it over the weekend and do the training and parallel, and we're up and running over the weekend.

This is becoming more and more the mode. And as I said, once you define a solution at that level, it's got to be multi-vendor in my definition. The old single vendor, vertical-integrated computer solution is a thing of the past, never to come back.

This is our industry. Product cycle is about three months. Carrying costs of things like processors and memory storage -- that means cost of money, cost to store it, and price risk when prices start to fall. If I don't have a price protection, carrying costs are about 50% a year for this stuff. So there is a big risk to having inventory, and the old model is best said: The distributor, the wholesaler, he carried industry to make service levels good. In today's day and age, customers want higher service levels that we can't afford to keep inventory. We have to have inventory turning, probably in our business turning 20-25 times, and today it's 10. So there's got to be some dramatic improvements here.

How does this affect the sales rep in the future? Well, the future technology sales rep will engage the customer on strategic use of technology. So come in higher up in the organization, not at the purchasing level, but at a strategic level, and talk about various points of strategy.

Catalog is great. In fact, we used to produce catalogs monthly and send them out to our salespeople and value-added resellers' sales forces, and we spent $2 million per month sending catalogs out. On the day they were printed, they were obsolete because they had the wrong prices in them. They of course didn't have supply points at all so you didn't really know if it was in stock or even available anymore, because it may have been discontinued. So obviously, this is not what you want to do. You want that catalog to be customized, and you want it to show everything a customer would want: relevant prices to relevant supply. Or I almost think, rather than supply, estimated time of arrival. Customers don't care how many you have; they want to know "when can I get it?" The idea of virtual warehousing, or we're starting to call it E-inventory, electronic inventory, we think is going to be alive and well in this marketplace.

I would contrast the old and new this way: The old was slow, the new is fast and responsive. The old was static, the new is dynamic. The old was information-constrained. You only told the customer what they really needed to know, and the new one is information-enriched, where the customer has a choice of whatever information may be out there. The information is really sorted and prioritized the way a customer might want to see it. Instead of limited choice, there's rationalized choice. Instead of a central authority, the sales rep really becomes empowered in this model. Rather than entering an order multiple times, the product is selected one time. Rather than being supply-chain focused, it's buy-chain focused.

RON PARSONS, DIRECTOR OF E-COMMERCE BUSINESS STRATEGY AT COMMERCENET

CommerceNet was formed four years ago this month. I was actually involved six months before that. I went out to view it from the Commerce Dept. point of view, to understand whether the government should invest in it. But the primary focus of CommerceNet has been to drive Internet-based electronic commerce since Day One.

The concept of working together is the first part. We work with over 500 members. We've got a staff, on a good day, of over 25 people. We don't accomplish a whole lot with just our staff. When you look at making [the Net] easy, trusted, and ubiquitous or pervasive, we understand what easy means. When you take a look at trusted, that does not mean secure. We know how to do security, and you know we know how do security. But how do we get the people to trust it?

A little bit of background here before I start talking about the goals and looking at the salesmen. We've gone from communities of interest, where people were just looking at things because it was the cool thing to do. Randy Whiting, who I'm here representing tonight, just wrote an article called the "Death of Cool" because we moved into the real business realm of electronic commerce. We moved from there to communities of commerce, where people could then buy and sell online. But ultimately what we want to do is have communities of productivity. We want to empower the supply chain. That's why we use the larger definition of electronic commerce. It's anything that enables and empowers a business to improve the way that it delivers services, the way that it reaches customers. Literally, it's exploiting IT for business advantage.

We just did a barriers and inhibitors study with Nielsen, contacting over 16,000 people. One of the No. 1 inhibitors was: How do you do this integration with your back-end processors? The No. 1 used to be security and trust, but that's way down the list on the business-to-business realm. Some people want to really understand what it means to their business. How do I have to restructure my business? What are the dangers of me being disintermediated? What are the opportunities for me to be intermediary?

Let's take a look at history. Let's take a look at where we're going and what that might mean. First-generation Web -- "Have Eyes Will Travel" is what I like to call it. As long as you've got your browser, you can go out and you can find stuff. You don't necessarily care what format it is in: Your browser will convert it for you, and you can see it. Here's what you see on your computer if you go to American Airlines, for example. All it knows is how to make it pretty on your screen. So, that's all it can do. As long as you're there to search through it, you can get something done.

Moving to the next generation.... When you take tagging right now, when you start talking about that kind of infrastructure, you're talking Java, XML. Now you can look at things with computers instead of with eyeballs. This schedule now has some extra tags in it. XML, the eXtensible Markup Language, has sometimes been called HTML+ or ++ or for those of you who are techies, SGML- -. But the bottom line is that is has some of the richness of SGML without all the overhead which requires PhD scientists to operate it. So it's got the best of both, and I think that it's going to drive a lot of the direction. So we can go now, and we can search a site. You can get that best flight price on an airline because you can search a site with your computer instead of with your eyes. Right now, the travel agents are not in trouble yet. Because I don't know about you, but I can never get as good a price as my travel agent can. I just don't know what it is yet, but when we get things tagged, we get the marketplace enabled--that will change.

There are a lot of initiatives out there right now. I belong to the SFEOAFNO. That's the Society For the Elimination Of Acronyms From Now On. I suggest that all techies join it. There are all these different initiatives out there, and did you notice that some of them have the letter "o" in them? They claim that means open. What it really means is overlapping. And even where they overlap, they don't play together. So, we decided that one of the things we needed to do was come up with an umbrella where these things can come together underneath.

We have digital anarchy. We've got all these stovepipe protocols. By the way, anarchy in and of itself is not bad. In the ideal digital world, we want anarchy. Anarchy is defined as any two people being able to define an instantaneous one-to-one relationship and do business. That's the proper anarchy. But the anarchy we got going on out there now is that everybody is doing their own thing, and they can't talk even one-to-one.

What we need is an open framework that integrates all of these together as a large tent of inter-operability. I used to be an associate director back at NIST [National Institute of Standards & Technology] in my three years with the government. And I said this there, and I'll say it now: We don't have time to wait for the standards. The standards are very important, and we must let them roll along. But we have to work out ways to inter-operate right now. We don't even have time for de facto standards, or Bill Gates will come and tell us what we're supposed to be doing. We need a way to inter-operate so we can pull all these standards together and we can work together.

What about the salesman? I understand we're supposed to say something about that here. Let's take a look at the historical. We used to have in the historical role of the salesman [that] they managed accounts and they managed them very well. They maintained universal relationships, which I think was called "taking them to lunch." But one of the things that they did that goes away is that they controlled the information flow. I'm not going to talk about product B coming down the pipe next month, cause I've got a quota of product A. You don't control that anymore. They will know that product B is coming down the pipe, so you're going to get more as you're managing the relationship in the future. They also manage the procurement process very tightly. In some cases, they will still manage that procurement process, but that's changing. As we heard earlier, they distributed a lot of catalogs.

Because of some of the work that is going on, let me tell you what happens. Let's take for example Dell -- just to give you an example of the power of information and just to understand what's going on in the supply chain. Most organizations right now, as have been alluded by several of the panelists, do not even know what is going on in their supply chain. They get an order in for 2,000 of something, and they don't even know if they've got it in their supply chain or not. Dell on the other hand knows what's in their supply chain. One day they were sitting there looking at what is going on, and they saw the two-gig hard drive just switched. The price point had reached the point that two-gig hard drives weren't selling and four-gigs were. They immediately put a phone call into the distributor and said, "Cancel all orders of two-gig hard drives." Well, after that person got up off the floor, he hopped in his car and drove down to another computer company and said, "Have I got a deal for you on two-gig hard drives," and they bought them. It wasn't until several months later that they found out when the stores started shipping them back that people didn't want two-gigs anymore. That's the power of information, the power of knowing what is going on in your supply chain.

The emerging role is that we're looking at salespeople that will be managing a cultural relationship. They can't live with that information flow anymore. They are going to be working closely with these people, not just to sell a product but to figure out ways that they can empower their supply chain. Maybe it's going to be helping these people create new relationships. What does it mean in the corporate structure? The incentive plan has to change. It's not going to be on a price-per-box basis. If the people can go and order in different places in the supply chain, well, the salesman would be against you. You'd prevent them from going to one area of the supply chain because he got his incentive from another area of the supply chain.

An example is Marshall. Marshall went out and literally removed all direct product incentives. Everybody was based on the profitability of the company. Well, when you nearly doubled your profitability, with a slight 1% decrease in staff, everybody still made more money than they did before, but they were all working together. It didn't matter whether it was sold through the Net, sold directly, or which channel it went through. Everybody got a benefit.

So, it also has to be an area where it can be agile. We heard agility mentioned. You have to be willing to change that plan as you move forward. Ultimately, what does that mean for the salesman? Well the salesman is coming up with a new set of skills. They must have a broader understanding of the marketplace. They can't just understand how to sell this one box. They have to understand how this box fits in with everybody else's boxes to figure ways to integrate this together. They're going to be negotiating at a different level. They're not going to be negotiating a sale of just one system. They're going to be negotiating a way that they can work together with that customer. Those salesmen need to be empowered to make decisions that they never had to make in the past.

The bottom line: Yes, salesmen and intermediaries are always necessary -- they always were, and they always will be. Their roles and required skills will change. Significant changes are going to be necessary throughout the supply chain or throughout the supply Web in terms of how you incentivize them and how you utilize them. The timing of how this will happen? I don't think it's very clear right now. I think the transition path is still something that you talk about and get six different answers.